Pricing and Product Strategy Lifecycle Pricing 1

Life Cycle Pricing Life cycle pricing assumes that a product category will go through various stages or phases. These stages are introduction, growth, maturity, and decline. The concept of product life cycles can be applied to individual products or services, but is more appropriate when examining product categories. Not all product categories go through an entire product life cycle; some take a very long time to introduce, while others take a very short time to reach maturity. When evaluating a product life cycle, remember that the product category’s growth is contextual. Changes in context can easily change the nature (or direction) of the product life cycle.

Graphical Representation of a Generic Product Life Cycle Lilien and Rangaswamy (2003) Marketing Engineering, 2nd edition

Examples of Product Life Cycles Kotler (1991), Marketing Management, 7th edition Lilien and Rangaswamy (2003) Marketing Engineering, 2nd edition

Product Life Cycle, Competition Cycle, and Pricing 100% Capacity Share Market Share Production Costs Price Premium Sole Supplier Competitive Penetration Share Stability Commodity Competition Market Withdrawal Source: Frey, J.B. (1982), “Pricing Over the Competitive Cycle,” © Conference Board, New York

Pricing in the Introduction Stage of the Product Life Cycle Product is new to market. Communication of information to consumers is important to establish the new product’s worth or value in the consumers’ minds (economic value). Price sensitivity is relatively low since consumers have difficulty in recognizing value. Price-induced sampling can be successful, but products or services should be used relatively often. Also, the products should be able to demonstrate value to the consumer quickly. Direct sales can be utilized for high uncertainty products (products viewed as risky by the consumer). Goal is to reduce consumer uncertainty and risk by revealing the value of the product to the consumer (…it’s worth the price…) Exploit the distribution channel to promote the product. Examples include higher retail margins, distribution rebates, and covering inventory costs.

Pricing in the Growth Stage of the Product Life Cycle If the product/service is profitable, competition will enter the market in the growth stage. A company can either choose to follow a differentiated product strategy or a cost leadership strategy. Differentiation Cost Leadership Focus on attributes valued most (or attributes that can generate the greatest return) Skim price segments valuing product Penetration price by keeping price the same as competitors, but lock in higher market share before competition can imitate Cost leadership can be very effective if margins are highly dependent on sales volume Cost leadership can develop cost economies in distribution Cost leadership is effective if the firm is the low cost producer in the industry…the firm may have a competitive advantage or a comparative advantage that leads results in their low-cost production leadership Markets that are not very price sensitive will be less likely to lead to cost leadership since sales/production volumes may not be high enough to use price penetration

Pricing in the Growth Stage of the Product Life Cycle The following questions should be considered in the growth stage: Is there a market segment that desires unique product benefits and is willing to pay premium prices for them? Does the firm have the requisite distinctive competence to produce and market a differentiated product? Is the market sufficiently price sensitive to produce significant cost economies? Is the firm willing to commit the resources and bear the risk necessary to see through a cost leadership strategy until it pays off? Are there advantages that small market share firms can exploit? How much product specialization will the market pay for? How much specialization will the market sacrifice to attain the lowest price?

Pricing in the Maturity Stage of the Product Life Cycle Profitability of a product is correlated with how well the firm has competitively positioned their product/service. Market share maintenance becomes the focus in the industry. Buyers become increasingly price sensitive to products that are in their maturity stage. Brand loyalty and reputation (brand equity) are more difficult to maintain. Similarity between different manufacturers’ products becomes increasingly apparent. Effective pricing in maturity focuses not on valiant efforts to buy market share but on making the most of whatever competitive advantage(s) the firm has to offer the market

Pricing in the Maturity Stage of the Product Life Cycle Tactics firms use to counter lower margins in the maturity stage: Expand the product line width and breadth Reevaluate the distribution channels used (reduce dealer margins) Unbundle related products and services (customers are keenly aware of components that are needed and unneeded) Improve the estimation of price sensitivity Improve product control and utilization of costs of manufacturing and marketing the product/service

Pricing in the Decline Stage of the Product Life Cycle When production costs are mostly variable, then a considerable amount of attrition occurs in a market that is in the decline stage. This results in stable prices. [Example – retail stores] When production costs are mostly fixed, then firms tend to fight to maintain market share. This often leads to severe price cutting (price war). Firms do this to maintain cash flow for fixed cost recovery. [Example – pulp & paper]

Pricing in the Decline Stage of the Product Life Cycle Alternative strategic approaches when in market decline: Retrenchment – discontinue marketing to some segments and focus on segments where firm is more profitable or has a stronger competitive position relative to competitors. Planet Hollywood Harvesting – similar to a retrenchment strategy whereby a firm gradually withdraws from the weakest segments first then eventually completely withdraws from the market. Studebaker Conslidation – the firm aggressively attempts to gain a stronger position in the declining market. If successful, the firm typically has a much larger market in a much less competitive industry. Northrup Grumman Lockheed Martin Marietta Douglas McDonnell Boeing